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Geithner’s 2.0

Since, some weeks ago, I was among those who commented on how unconvincingly Treasury Secretary Timothy Geithner laid out his plan for a private-public partnership to purchase toxic assets from banks, I thought I should probably review the issue now that he has come forward with the details he promised. We analyze where we think we may have some specialty—as a non-economist who reports on financial issues but mainly writes for a living, I was drawn in the first go-round to how sloppy and muddled the principal Treasury statements were, particularly given the extraordinarily high stakes involved. (As a new-fangled blogger, I have learned about the perils of first-draft, hastily-published language that reaches sizable audiences—in my case, however, free market capitalism does not hang in the balance.)

This time out, it appears that the Treasury publishing department employed some editors, circulated drafts around the political horn, and generally did a more professional job. There is a bright, insistent polish in the words familiar from political messaging shops in Washington—the language is partly explanatory, partly spin, but at least it is almost always clear and organized, given the difficulty of the subject matter. There is an attractive bias in the explanatory passages toward making the words accessible to the largest possible audience. I particularly like the labeling touches: “Legacy Loans FAQ” and “Legacy Securities FAQ.” The Treasury method, apparently, is to invent a politically palatable phrase to describe an arbitrarily defined category of zombie-bank-balance-sheet complexity and then pretend that people have been deeply curious about this phrase for many months. Clever!

On the substance, I’ve read the documents twice, and only one thing seems crystal clear: The Obama Administration designed this plan in large part because they are afraid to go to Congress, as temporary receivership or its policy cousins would require. If your task was defined as: Take the previously authorized T.A.R.P. money, and in combination with Federal Reserve action, use leverage and Fed powers to take as many toxic assets off bank balance sheets as possible, then this is the plan you might devise after a lot of head scratching.

It’s mostly clear why private investors might want to participate on the buy side, as Black Rock and Pimco have said they will do. It’s much less clear why zombie banks would participate on the sell side, since most people assume that any price the buyers would want to pay, even if elevated by taxpayer subsidies, would be too low for the banks to accept, given the danger that it would turn them from zombies to explicitly insolvent. Surely Treasury has thought this through, but their theory of how the sales, the stress tests, and the broader problem of zombie banks will interact under this plan is just not clear from their own documents and testimony—or at least, it is not clear to me, after a couple of readings.

It would be a rare thing if a plan designed to conform to that which is politically possible, rather than to that which is necessary, could succeed against a problem of this magnitude. (Perhaps, as some economists hope, the problem is not as large as it appears—that would be, of course, just fine.) Warren Buffett, however, has described the banking crisis as an economic Pearl Harbor. If he’s correct in his choice of analogy, then this plan feels a little like Roosevelt’s Lend-Lease—a holding measure, trending in the right direction, but too much constrained by what politics will currently allow.

Steve Coll, a staff writer, is the dean of the Graduate School of Journalism at Columbia University, and reports on issues of intelligence and national security in the United States and abroad.